I am not sure if a danish newspaper qualifies as the end all and be all of sources. This is an excellent idea. In the US you could allow people to take from their retirement accounts to purchase the bonds. You would then basically be paying the interest to yourself. Either way it is a good idea to allow people to make the choice about their own ability to pay.

I find it fascinating. On one hand there are a lot of people claiming that one should borrow only as much as one is able to pay back. I am sorry but that is silly at best - clearly the only person that is always able to pay back is the one that does not need the mortgage and amid bank collapses around keeps own money in one's own safe in the cellar.On the other hand although we see how bad the current system functions there are still proponents of 'more of the same' way of getting out of trouble. I think that is bizarre. Even if danish system is in tatters and having various problems it may serve as source of ideas for creating new healthier system. This is even more so as the reason why our finance systems are in such trouble is not mortgage only but the casino mentality and belief that one can create wealth out of nothing. So yes please provide more details on how the system does not work in the kingdom so that we can pick the good stuff and build a new healthier one. More of the same (loosen the mortgage rules for instance as some propose here) is just a perfect recipe for shooting oneself in the same foot as before with the same weapon. That is not very smart.

By this time in the crash, it is USELESS to talk about tightening mortgage rules. In fact, the opposite should be applied -- lessening the rules and encourage buying (read: speculation.) As a matter of first-hand witness, that's one reason for the historic low rates and various government subsidies for home buyers. I saw many smart investors are busy snapping foreclose properties. The rule should be tighten later after things picking up, not now. The end result will be that the rich investors will get richer while the poor ones get poorer. That will NOT change.

Excellent article. Danes may also be less interested than Americans in impressing others with their possessions. Tres simple solution: borrow only what you can afford for housing. And banks might consider lending to the minimum their clients can afford, not the maximum.

Sorry, one more, I couldn't resist sharing the following information from the Danish national newspaper Berlingske Tidende, December 4, 2008, http://www.business.dk/article/20081204/ejendom/81204006/. First a quote in Danish, but with English translation following: "Det danske ejendomsmarked er nu i en så elendig forfatning, at staten bør gribe ind for at forhindre en større nedtur, som rammer hele det finansielle system og i sidste ende den økonomiske vækst i samfundet."In English: 'The Danish real estate market is now in such a miserable state, that the State should intervene to avoid a large down-turn, that could hit the entire financial system and ultimately the economic growth in society.' End translation.The simple rule is that one should not borrow more than the capability to pay back, which is independent from the particular set-up of the mortgage system. But as America showed, regulation is needed. Few inherent problems occurred in the majority of European countries, so all these approaches will do.It remains a mystery though why the Economists puts such poorly-researched article on its website. As for the Danes defending their systems, this is probably due to a clan-like mental state prevalent in Danish society, as it is small and homogeneous and caught between a strongly industrial Sweden, an oil-booming Norway, a history-laden Germany, and an EU that wants openness N-S-E-W etc... (but such discussion is beyond current topic).

At the end of the day one has to return to first principles of the market: a property has a specific total value (not monthly payment!!) determined by the seller and buyer under prevailing conditions at a given moment. The buyer enters negotiations with a mortgage provider aiming at best conditions (in principle on a case by case basis, although cases can be grouped), from which a monthly payment will arise. All other things being equal, stretching your payment potential less should result in a lower risk, hence in principle lead to more advantageous mortgage terms. A few simple additional rules, such as 80 % max, should be rigorously applied; mortgages should not be repackaged as to render them opaque. The US system has failed to live up to this; the Danish bond system undermines the importance of the actual value of a property and gives rise to unnecessary and costly re-financing procedures for the buyer (the buyer should have no business/cost related to previous mortgage deals of the property that he wants to acquire); the Danish real estate market has recently suffered drastically, read DK newspapers which most here don't/can't. Perhaps the Economist should more rigorously analyze fluctuations of private house prices over longer time spans. If you move away from first principles of the market and make the actual value of a good opaque you are bound to enter major problems (collapses) or less severe problems (strong fluctuations).

Danish culture should also be given some credit. I highly doubt that Copenhagen would have as many condo flippers as Miami under similar mortgage rules. Their bankers and borrowers may simply be more sane and sober.

Humm, it seems the only benefit from the US model is that the borrower can buy up his own debt at market prices. If I understand, he can buy up a bond at 80% face and apply 100% of the face or par value to the amount he owes right? In the US, most people can prepay any amount they wish without penalty on their mortgages. That is I can choose to pay $1000 or $1 "extra" and have that go to reducing the principal. What happens is that the monthly payment doesn't change, but thanks to that principal reduction, the term of the loan is shortened and I end up paying less interest over the life of the loan. For example, instead of making 360 monthly payments of $2000, I only have to make 355 payments in order to pay off the principal. Most mortgages in the US are non-recourse. That is the bank cannot go after you once a foreclosure sale happens. If you borrowed $1,000,000 to purchase a home, refused to make any payments, and the bank can only get $500,000 from a foreclosure sale, the bank has to take $500,000 in losses. You walk away and owe nothing, even if you are a billionaire, the bank cannot go after you for the difference of $500,000. That's why many people who are being foreclosed on actually will lose next to nothing. If they borrowed 100% of the purchase price, well it's too bad for the bank if the home is now worth only 50% of what they paid. Many people are simply walking away and refusing to pay the mortgage even if they can pay because there is no point. They will not see a profit so why continue making payments? Just walk away and let the bank eat all the losses. Even better, since foreclosures take time, you could live rent free for a while in that home. And thanks to the stupid government, you might get even more time to kick back and live rent free because the government is pressuring banks not to foreclose. The problem here in the US is with our banks, not with homeowners. Most people who are in default purchased their homes recently and with almost nothing down. It's all on the banks, the government wants to pander and seem sympathetic when these people aren't suffering to begin with. The government is making the situation a lot worse. Of the mortgages that have been "remodified" to reduce principal (mostly by government force or threat), more than 50% go into default again within 3 months. The borrower simply does not want to pay because he can walk away. Why pay a mortgage every month if you will not be able to profit from the sale of a home even if you wait 10 years? Just rent another place if it is cheaper. The government seems incapable of understanding this.

@ Sarastro:The rate of the bond is detached from the lender's payments on the loan. The mortgage institution is responsible for fulfilling the payments on the bonds vis-à-vis the investor. The institution is secured through the letters of mortgage in the respective properties, issued by the lenders=property owners. The risk for the investor of the lender defaulting is reduced by the issuance of large series of bonds, which spreads the risk thereby greatly reducing the possibility of a vast number of home owners defaulting within the same series of bonds, making it collapse. This has not happened for more than 300 years.If a lender defaults, his property is realised on a forced auction at the Royal Bailiff's office (a section of the court). Any residual claim, i.e. what is not covered by the sales price, is pursued by the mortgage institution. If the collection of a claim proves futile, the institution withdraws from its reserves, keeping the investors free of risk. (All lender payments consists of four parts: Interest, downpayment, administration fee, and contribution to the reserves; the latter two are of negligible size compared to the quarterly rates.)The Danish mortgage institutions were originally associations or unions of lenders, i.e. credit institutions, authorised by the majesty to issue mortgage bonds secured by letters of mortgage. Now they have been incorporated, governed by strict laws and regulations. For more than three centuries, not a single mortgage institution has defaulted or gone bust. This proves the genius and strength of the system.@ derek5:The actual house price becomes less relevant when the interesting question is the monthly (quarterly, actually, but computed at a monthly basis to be comparable with people's incomes) payment, i.e. what fits your current and future budget. Nevertheless, no one ignores the total value of the house, and most houses are sold below the initial offering price; a common feature in all free market trade.Your experience proves that you must have received poor advice because one does not have to deal with previous bonds; most properties are entirely remortgaged when sold, and one can remortgage at any time. One only has to deal with previous bonds if one chooses to take over the existing mortgage in a property (is possible pending the approval of the mortgage institution). In some instances it actually pays to enter existing mortgages rather than to remortgage but most buyers choose to remortgage to obtain maximum tax benefits.The house price proper then becomes of minor significance and only becomes relevant if one wants to buy a house cash (happens rarely) or the instant one wants to sell one's property. As long as you possess a house, you pay the rates that were fixed at the time of the purchase (unless you have chosen mortgages that are refinanced at regular intervals). It is true that if you purchased a house when house prices were high and have to sell it when the prices are depressed, then you might suffer a loss, perhaps even become technically insolvent. However, this does not happen in the majority of the cases, and is a "flaw" in the free market economical system that per definition is impossible to eradicate.Denmark might not have a strong industrial base but unlike USA the country has managed to pay out all debt, full employment, low default and foreclosure rate, and until recently had a comfortable surplus on the balance of payment. I would at any time prefer the Danish mortgage system to the American for the reasons set out in the article. The American taxpayers, who are much more exposed to the fluctuations of the housing market due to the extra dynamism of the American economy, now have to cough up billions of dollars to bail out the American mortgage institutions; in Denmark, the mortgage institutions continue to do business unaffected by the turmoil in the rest of the world, like they have been doing for more than 300 years now.

Without going into the technical details, I - from own experience - am not impressed with the Danish system: as someone wrote earlier, I can confirm that actual "house prices" are less important; it is monthly payment rates most buyers focus on. Furthermore, as a buyer you need to deal with previous bonds, on which terms you have had no influence and which have no relation to your own financial potential in getting the best possible mortgage terms. Furthermore, the house prices / monthly rates fluctuate rather strongly: in good times there is a rapid increase; with rapidly shifting economic situations in Denmark (an apparent dynamism, but at the same time a lack of stability, Denmark not having a strong industrial base), they thunder down. It is no way to go, this is not to say that it possibly is better than what happened in for example the US. Think again.

@MurkyMar et alia:Danish mortgage institutions (they are not banks in the traditional understandning) issue series of bonds in vast numbers, amounting to billions of Danish Kroner (DKK), usually in sizes of 1,000 DKK a piece. The bonds are bought by investors at the Copenhagen Stock Exchange (CSE). The loans are secured by letters of mortgage in the respective properties. The bonds carry a fixed interest rate. However, the investors adjust the return of their investment by the bidding rate of the bond. For instance, a bond carrying 4% in nominal interest rate might be sold at rate 80 (%) so the resulting interest all of a sudden is 5%. The rates change during the day, depending on supply and demand.The sales price for the bonds are directly transferred to the lender (minus negligible sales costs and fees). If the selling rate is 80, he only receives e.g. 800,000 DKK on a loan, which principal is 1,000,000 DKK but he still has to mortgage 1,000,000 DKK. If he has to pay the seller 1,000,000 DKK cash as part of the price for the property, he thus would have to raise a loan of 1,250,000 DKK at rate 80. The risk of fluctuations in the bond rate thus rests on the lender; on the other hand, this only comes to the fore the instant the lender chooses to pay down or pay out the loan.The home owner does not have to localise the exact same bonds that financed his particular loan. It suffices that he buys up bonds of the same series. This is done at CSE at the rate at the time of the buy-back. In practical terms, the buyer pays in cash via his bank, which liaises with the mortgage institution. In most instances, the refinancing is done in the same process as remorgaging the property, be it in connection with a sale or a refinancing of the mortgages in the property, e.g. if the general interest rate in the society has changed significantly.Mortgages and speculation in remortgaging has become a favourite topic for discussion over dinner tables in Denmark, amounting to a popular sport since it affects almost all citizens.It is true that many home owners only pay the interest on the loan for the first 10 years of the amortisation of the loan (thence begin the downpayment), but it should also be mentioned that a number of estates are free of encumbrances of such nature and the majority has equity that exceeds the 100-80=20% required by law, already due to the regular downpayments.The Danish mortgage system was a German invention but it has been honed to a close-to-perfection system over more than three centuries, surviving wars (Napoleonic and World Wars), changes to the social and political order, and financial crises of all sorts. Other countries would undoubtedly benefit from introducing similar systems.

"two characteristics"To expand on, and based MurkyMar’s comments, there are optional, limited early repayment terms available with some UK mortgages. These reduce the principal and therefore future payments (whether that be variable or fixed). However, they do not come at a discount but the mortgage rate charged is higher because you effectively buy a call option on your own debt. Apparently people have started making more use of this since the crunch, which is reflected in significantly higher saving rates (and lower consumption rates).With regards to the above header:1. Securitisation will devolve to what it used to be with seller-ownership responsibility and the implied adverse effect on mortgage availability, providing banks’ tight standards to [re-]gain investors’ trust. This precisely seems one of the crucial issues for a falling housing market. And even if homeowners’ repayments become more trustworthy again, access to investors’ money will be restricted. Negatively affected will be firstly those who then cannot gain ownership, and generally all in the market who will be less flexible.2. Homeowners in general are handed a buy-back option at discounted rates when house prices fall, encouraging saving at more attractive terms. For me, this second characteristic is worth considering further.

beezernotes,I realized I didn't exactly get to the point of your question to provide a full, clear answer.To redeem the bond, you have to find your bond throughout Denmark. Would have been harder to do in say 1880s than now! Of course if your mortgage contract allows some other bonds may be substituted, but even then it would probably be a subset of the market. Borrower pays its price, gets the bond document, takes it to his mortgage bank and gets a reduction in principal equal to the face value of the bonds he bought.The homeowner may have the cash as the bonds are chunked up into bite-sized pieces before being distributed in the market.The homeowner can choose to borrow money to refinance or use inheritance to pay it all off, whatever. What this system really does is to allow homeowner/borrower the flexibility to prepay the mortgage principal at any time in any amount. I'm Canadian and our mortgages nearly never have that much prepayment flexibility!

beezernotes,Suppose,a Danish borrower borrows 800,000 koruna from a mortgage bank; the bank will originate the mortgage and when it creates the mortgage bond it may decide to create mortgage bonds of face value of 5,000 koruna. What this means is that, ceterus paribus, the house's value will be divvied among 160 mortgage bonds. (Because of possible large interest rate differences between the time of mortgage origination and mortgage bond origination the 160 coud be 164 or 152 hence I'm using a ceteris paribus statement to make the math a bit easier to follow).When the borrower decides to prepay his mortgage; what he has to do is locate the mortgage bond that represents his mortgage (or if the bank agrees to it, and contract allows: a similar mortgage bond with same characteristics i.e. maturity/duration, yield); buy that mortgage bond from its current holder; take it to the borrower's bank and state: "This is in lieu of my mortgage, please reduce the principal by this amount."Suppose a borrower's mortgage bonds were trading at a 80% discount to face value. To prepay his mortgage, the borrower does not need to pay the bank 640,000 koruna to reduce his interest rate; he can use just 4,000 koruna. This reduces the out-of-pocket interest costs he has on his mortgage (he's got a lower principal now) and builds equity into his home. The Danish borrower also has the option to go to another bank for a mortgage of 640,000 koruna at a much lower interest rate. So if you live in Denmark, and the government drops interest rates but your house's price has been falling because of the housing market; you have a clear incentive to buy back your mortgage bond; thus reducing the interest rate on your mortgage debt and reducing the principal on your mortgage.

It seems I recall from visiting Denmark in 1961 that there were then many mortgages with very long terms, for example 75 years, so one was, in effect renting a property rather than purchasing it outright. I wonder if this is true and still so? It suggests a way of increasing affordability.

And how does one actually go about redeeming said original mortgage bond if, as cited in the article, the bond is trading at a discount? I'm assuming the homeowner doesn't have the cash to buy said bond (otherwise why take a mortgage in the first place). So is the homeowner simply borrowing to buy the old bond, thus in effect re-financing by purchasing a newly issued bond?

surfgeezerThe lefty Sen. Dodd got the "special deal" mortgage from Countrywide. While we are on Dodd, how much money did he collect from Fannie and Freddie? He was pretty near the top of the list of recipients. How much did Fannie and Freddie give to the lefty Obama for his brief stay in the Senate? It was the left that was so upset with regulators that wanted to clamp down on Clinton's guy Raines the crook and both Fannie and Freddie Clinton signed the Commodity Futures Modernization Act of 2000. It was the left that were the cheerleaders for sub prime lending. Just a couple of facts.

Gramps11 it was the righty politicans that danced to the lobby/bribe and got rid of the depression area regulation of 20% down and delinking loans from originators- which if you read the article is EXACTLY why the Danes are doing better. Idealogues never let facts stand in the way.